The Numbers Squeeze Hollywood

By GERALDINE FABRIKANT

Published: September 7, 1991

These are hard times in Hollywood. No sooner did eager buyers rush to Columbia Pictures and MCA, the parent of Universal Pictures -- and Time merge with Warner Communications -- than the movie business went into a slump. And on the heels of a worse-than-expected summer, there are no signs of an imminent turnaround, industry experts say.

So far this year, the United States box office is down 3.9 percent, at $3.19 billion through August, compared with $3.32 billion for the first eight months of 1990 and $3.38 billion for 1989. It is hard to predict how the year will end, but there is little chance that this will be a banner year for Hollywood. Ticket sales are down this year so far from the previous two years.

"The movie business is sickly," said Joe Roth, the chairman of the 20th Century Fox Film Corporation. "There are just too many movies and too few admissions. The cost of movies has gone up over the last five years. If you looked at a graph of how much it cost to market a movie, the stairs got steeper and admissions have declined. And there are no new revenue streams. The numbers just don't add up."

"The business is in a very bad periodic down cycle," echoed Thomas Pollock, the chairman of Universal Pictures.

Studio executives, ever hopeful in their hits-driven business, thought several summer blockbusters might pull the industry out of the doldrums. Instead, a surprisingly large number of films fared poorly in the last few months, like "Hudson Hawk" with Bruce Willis and "V. I. Warshawski" with Kathleen Turner.

In addition, Fox's "Dutch," Tri-Star Pictures' "Bingo" and Columbia's "Return to the Blue Lagoon" each did less than $10 million at the box office. There were also dozens of flops, films that did not, in industry parlance, open.

Only three films became big hits: "Terminator 2," "Robin Hood" and "City Slickers."

But two of those films were extremely costly to make and were not produced by the major studios themselves. "Terminator 2," starring Arnold Schwarzenegger, was produced by Carolco Pictures Inc. and distributed by Tri-Star. Morgan Creek Productions produced "Robin Hood" for Warner Brothers. While those arrangements kept down the studios' costs, they also reduced their profit potential because the studios reaped only a distribution fee.

The crucial added revenue beyond ticket sales has also been affected, because the box office reception determines a film's worth in other markets. "The studios' revenues from theatrical box office are typically less than one-third of the total revenues from a feature film," said David Londoner, a movie analyst at Wertheim Schroder & Company. "But they determine, to a large extent, how much a studio can get from home video and other markets." Ballooning Costs

The poor box office business hurts studios doubly because budgets and marketing costs continue to rise despite efforts to control the ballooning costs of making movies. The result appears to be a squeeze on profit margins at a time when several major studios have become part of larger conglomerates that have substantial debt relative to equity. Harold Vogel, an entertainment analyst at Merrill Lynch, noted that the Sony Corporation's acquisition of Columbia entailed substantial borrowings. The same was true of Time's merger with Warner. The Pathe Communications Corporation, the parent of MGM, is in a financial crisis, as is the Orion Pictures Corporation.

While the overseas market for American films remains one of the brightest areas not only for the movie industry, but for the nation, it also contributes to the difficulties in controlling costs. Foreign sales have been the fastest-growing area in the movie business. And further growth is expected as Eastern Europe opens and ancillary markets explode around the world.

The problem is that action films generally do better than comedies overseas, because action films depend less on understanding a cultural context. But they are generally more expensive to produce and have increasingly come to depend on a handful of superstars like the extremely well-paid Mr. Schwarzenegger for their success.

As Mr. Roth put it: "It is one thing for a director to say, 'Say that line again.' It's another to say, 'Blow up that building again.' " Few New Revenue Sources

For now, there are few new revenue sources to help offset staggering production costs. Throughout the 1980's, film production costs climbed. But their impact was offset as the movie industry expanded the definition of entertainment on an almost yearly basis with the growth of home video, pay television and advertiser-supported cable.

But the days of exponential growth have slowed. So while mergers may look smart in several years, "the jury is still out" on just how savvy companies like Time Warner, Matsushita Electric Industrial and Sony that advocated the merger value of "synergy," "globalization" and "vertical integration" will be, Mr Vogel of Merrill Lynch said.

The news may be a particularly bitter pill for the Japanese companies that invested so heavily in United States studios, although their overall results make it difficult to tell what pain, if any, they are feeling.